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Audit Strategy Memorandum Year ended 31 March 2016
May 2016
Mazars LLP
The Rivergreen Centre
Aykley Heads
Durham
DH1 5TS
Members of the Audit Committee
Durham County Council Pension Fund
Durham County Hall
Durham
DH1 5UE
May 2016
Dear Members
Audit Strategy Memorandum for the year ending 31 March 2016
We are delighted to present our Audit Strategy Memorandum for Durham County Council Pension Fund for the
year ending 31 March 2016.
The purpose of this document is to summarise our audit approach, highlight significant audit risks and areas of key
judgements and provide you with the details of our audit team. It is a fundamental requirement that an auditor is,
and is seen to be, independent of its clients, and Appendix A summarises our considerations and conclusions on
our independence as auditors.
We value two-way communication with you and we see this document, which has been prepared following our
initial planning discussions with management, as being the basis for a discussion through which we can also
understand your expectations.
This document will be presented at the Audit Committee meeting on 17 May 2016. If you would like to discuss any
matters in more detail please do not hesitate to contact me on 0191 383 6300.
Yours faithfully
Cameron Waddell
Partner
For and on behalf of Mazars LLP
Contents
01 Purpose and background .................................................................................................. 2
02 Audit scope, approach and timeline ................................................................................. 3
03 Significant risks and key judgement areas ...................................................................... 6
04 Your audit team .................................................................................................................. 8
05 Fees for audit and other services ..................................................................................... 9
Appendix A – Independence .................................................................................................... 10
Appendix B - Materiality ........................................................................................................... 11
Appendix C – Key communication points ............................................................................... 12
Appendix D – Forthcoming accounting and other issues ..................................................... 13
Our reports are prepared in the context of the ‘Statement of responsibilities of auditors and audited bodies’ and
‘Terms of Appointment’ issued by Public Sector Appointments Limited. Reports and letters prepared by appointed
auditors and addressed to members or officers are prepared for the sole use of the Authority and we take no
responsibility to any member or officer in their individual capacity or to any third party.
Mazars LLP is the UK firm of Mazars, an international advisory and accountancy group. Mazars LLP is registered by
the Institute of Chartered Accountants in England and Wales.
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01 Purpose and background Purpose of this document
This document sets out our audit plan in respect of the audit of the financial statements of Durham County Council Pension Fund (the Fund) for the year ending 31 March 2016, and forms the basis for discussion at the Audit
Committee meeting on 17 May 2016.
The plan sets out our proposed audit approach and is prepared to assist you in fulfilling your governance responsibilities. The responsibilities of those charged with governance are defined as to oversee the strategic direction of the entity and obligations related to the accountability of the entity, including overseeing the financial reporting process.
We see a clear and open communication between us and you as important in:
reaching a mutual understanding of the scope of the audit and the responsibilities of each of us;
sharing information to assist each of us to fulfil our respective responsibilities;
providing you with constructive observations arising from the audit process; and
ensuring as part of the two-way communication process that we, as external auditors, gain an understanding of your attitude and views in respect of the internal and external operational, financial, compliance and other risks you face which might affect the audit, including the likelihood of those risks materialising and how they are monitored and managed.
Appendix C outlines the form, timing and content of our communication with you during the course of the audit. Appendix D sets out forthcoming accounting and other issues that will be of interest.
Scope of engagement
We are appointed to perform the external audit of your accounts for the year to 31 March 2016. The scope of our
engagement is laid out in the National Audit Office’s Code of Audit Practice.
Responsibilities
Audit opinion We are responsible for forming and expressing an opinion on the financial statements. Our audit does not relieve management nor the Audit Committee, as those charged with governance, of their responsibilities.
Fraud
The responsibility for safeguarding assets and for the prevention and detection of fraud, error and non-compliance with law or regulations rests with both those charged with governance and management. In accordance with International Standards on Auditing (UK and Ireland) we plan and perform our audit so as to obtain reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. However our audit should not be relied upon to identify all such misstatements.
As part of our audit procedures in relation to fraud we are required to enquire of those charged with governance as to their knowledge of instances of fraud, the risk of fraud and their views on management controls that mitigate the fraud risks.
We are also required to give an elector, or any representative of the elector, an opportunity to question us about the accounting records of the Fund and consider any objection made to the accounts by an elector.
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02 Audit scope, approach and timeline Audit scope Our audit approach is designed to provide you with an audit that complies with all professional requirements.
Our audit of the financial statements will be conducted in accordance with International Standards of Auditing (UK and Ireland) and in accordance the NAO’s Code of Audit Practice. Our work is focused on those aspects of your business which we consider to have a higher risk of material misstatement such as those affected by management judgement and estimation, application of new accounting standards, changes of accounting policy, changes to operations, or areas which have been found to contain material errors in the past.
Audit approach
We apply a risk-based audit approach primarily driven by the matters we consider to result in a higher risk of material misstatement of the financial statements. Once we have completed our risk assessment we develop our audit strategy and design audit procedures in response to this assessment. The work undertaken will include a combination of the following as appropriate:
testing of internal controls;
substantive analytical procedures; and
detailed substantive testing.
If we conclude that appropriately-designed controls are in place then we may plan to test and rely upon these controls. If we decide controls are not appropriately designed, or we decide it would be more efficient to do so, we may take a wholly substantive approach to our audit testing.
Our audit will be planned and performed so as to provide reasonable assurance that the financial statements are free of material misstatement and give a true and fair view. Materiality and misstatements are explained in more detail in Appendix B.
The diagram below outlines the procedures we perform at the different stages of the audit.
Planning
•Planning visit
•Risk assessment
•Considering proposed accounting treatments and accounting policies
•Developing audit strategy
•Agreeing timetable and deadlines
•Preliminary analytical review
Interim work and final fieldwork
• Interim work
•Document systems and controls
•Perform walkthroughs
• Interim controls testing
•Final fieldwork
•Receiving and reviewing draft financial statements
•Reassessment of audit plan and revision if necessary
•Executing the strategy starting with significant risks and high risk areas
•Communicating progress and issues
•Clearance meeting
Completion
•Final review and disclosure checklist of financial statements
•Final partner review
•Agreeing content of letter of representation
•Reporting to the Audit Committee
•Reviewing post balance sheet events
•Signing the auditor’s report
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Reliance on internal audit
Where possible we will seek to utilise the work performed by internal audit to modify the nature, extent and timing of our audit procedures. We will meet with internal audit to discuss the progress and findings of their work prior to the commencement of our controls evaluation procedures.
Where we intend to rely on the work of internal audit, we will evaluate the work performed by your internal audit team and perform our own audit procedures to determine its adequacy for our audit.
Reliance on other auditors
There are material entries in your financial statements where we will seek to place reliance on the work of other auditors.
Item(s) of account Other auditor Nature of assurance to obtain from the auditor
Contributions receivable Ernst & Young LLP Assurance on the accuracy of
LGPS contributions calculated by
Darlington Borough Council.
Service organisations
There are material entries in your financial statements where the Fund is dependent on an external organisation. We call these entities service organisations. The table below outlines our approach to understanding the services the Fund receives from each organisation and the effectiveness of controls in place to reduce the risk of material misstatement in the financial statements.
Nature of services provided and items of account
Name of service organisation Audit approach to be adopted
Investment managers AllianceBernstein
Barings Asset Management
BlackRock
CBRE
Royal London Asset Management
Mondrian Investment Partners
Aberdeen Asset Management
BNY Mellon Water Scott
We will substantively test transactions undertaken by the service organisations during the year and the valuations applied to investments at the year end.
Custodian JP Morgan
The work of experts
The following experts are relevant to our work for the year ended 31 March 2016.
Item(s) of account Management’s expert Our expert
Disclosure notes on the funding arrangements and actuarial present value of promised retirement benefits.
Actuary Aon Hewitt NAO’s consulting actuary (PWC)
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Item(s) of account Management’s expert Our expert
Disclosure notes on the nature and extent of risk arising from financial instruments
Mercer Limited None
Purchases and sales of investments
AllianceBernstein
BlackRock
CBRE
Royal London Asset Management
Mondrian Investment Partners
Aberdeen Asset Management
BNY Mellon Water Scott
None
Timeline
The diagram below sets out the timing of the key phases of our audit work. We will communicate with management throughout the audit process and will ensure significant issues identified are communicated to those charged with governance on a timely basis.
Jan–Mar 2016
Planning meeting
Interim work, including systems work (Jan-Mar)
Apr-May 2016
Issue Audit Strategy Memorandum to members (May)
Report interim findings , if required [May]
Jul-Sep 2016
Audit fieldwork on [Jul-Sep]
Issue Audit Completion Report (Sep)
Clearance meeting on (Sep)
30 Sep 2016
Issue representation letter
Issue auditor’s report
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03 Significant risks and key judgement areas We have performed our planning procedures, including risk assessment, as detailed in section 2. In addition, we met with management as part of the audit planning process to discuss the risks that, in management’s opinion, the Fund faces and have considered the impact on our audit risk. The risks that we identify as significant for the purpose of our audit are the risks of material misstatement that in our judgement require special audit consideration.
We set out below the significant audit risks and the areas of management judgement identified as a result of these meetings and planning procedures which we will pay particular attention to during our audit in order to reduce the risk of material misstatement in the financial statements.
Significant risks
Management override of controls
Description of the risk
In all entities, management at various levels within an organisation are in a unique position to perpetrate fraud because of their ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. Due to the unpredictable way in which such override could occur, we consider there to be a risk of material misstatement due to fraud and thus a significant risk on all audits.
How we will address this risk
We will address this risk through performing audit work over:
accounting estimates affecting amounts included in the financial statements;
consideration of identified significant transactions outside the normal course of business; and
journals recorded in the general ledger and other adjustments made in preparation of the financial statements.
Valuation of unquoted investments for which a market price is not readily available
Description of the risk
As at 31 March 2015 the fair value of investments which were not quoted on an active market was £701 million, which accounted for 32 per cent of net investment assets. The values used in the accounts are those provided by fund managers which are mostly based on Net Asset Value statements, although in some cases are based on forward looking estimates and judgements involving many factors. This results in an increased risk of material misstatement.
How we will address this risk:
In addition to our standard program of work we will:
evaluate management controls over the valuation process;
agree holdings from fund manager reports to the global custodian’s report;
agree the valuation to supporting documentation including investment manager valuation statements and cashflows for any adjustments made to the investment manager valuation;
agree the investment manager valuation to audited accounts. Where these are not available, agree the investment manager valuation to other independent supporting documentation;
where audited accounts are available, check that they are supported by a clear opinion; and
agree the price to independent evidence, for those valuations not supported by valuation statements.
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Disclosure of Funding Arrangements
Description of the risk
The funding arrangements disclosure note sets out the key elements of the funding policy and key information regarding the most recent triennial valuation as at 31 March 2013, including contributions to be paid by participating bodies to allow the fund to achieve 100 per cent solvency over 18 years.
While there are no accounting entries associated with this disclosure, the triennial valuation determines future employer contribution rates and the disclosure itself is material. The calculation of these figures can be subject to significant volatility and includes estimates based upon a complex interaction of actuarial assumptions. There is a risk of material misstatement due to high estimation uncertainty.
How we will address this risk:
In addition to our standard program of work we will:
review the management controls you have in place over the source data;
consider the reasonableness of the Actuary’s output, referring to an expert’s report on all actuaries nationally which is commissioned annually by the Audit Commission; and
review source data on a sample basis.
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04 Your audit team Below are your audit team and their contact details.
In addition to the above, an Engagement Quality Control Reviewer has been appointed for this engagement.
Engagement Lead
Engagement Manager
Team Leader
Cameron Waddell
0191 383 6314
Sharon Liddle
0191 383 6311
Chris Kneale
0191 383 6337
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05 Fees for audit and other services
Audit
At this stage of the audit we are not planning any divergence from the scale fees set by Public Sector Audit Appointments Ltd for the Code audit work.
Area of work 2015/16
Scale fee
2015/16
Proposed fee
2014/15
Final fee
Code audit work £25,918 £25,918 £25,918
Non-audit services
We do not currently plan to carry out any non-audit services.
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Appendix A – Independence
We are required by the Financial Reporting Council to confirm to you at least annually in writing, that we comply with the Auditing Practices Board’s Ethical Standards. In addition we communicate any matters or relationship which we believe may have a bearing on our independence or the objectivity of the audit team.
Based on the information provided by you, and our own internal procedures to safeguard our independence as auditors, we confirm that in our professional judgement, there are no relationships between us, and any of our related or subsidiary entities, and you, and your related entities, creating any unacceptable threats to our independence within the regulatory or professional requirements governing us as your auditors.
We have policies and procedures in place which are designed to ensure that we carry out our work with integrity, objectivity and independence. These policies include:
all partners and staff are required to complete an annual independence declaration;
all new partners and staff are required to complete an independence confirmation and also complete computer-based ethical training;
rotation policies covering audit engagement partners and other key members of the audit team who are required to rotate off a client after a set number of years; and
use by managers and partners of our client and engagement acceptance system which requires all non-audit services to be approved in advance by the audit engagement partner.
We wish to confirm that in our professional judgement, as at the date of this document, we are independent and comply with UK regulatory and professional requirements. However, if at any time you have concerns or questions about our integrity, objectivity or independence please discuss these with the audit engagement lead, Cameron Waddell.
Prior to the provision of any non-audit services, the engagement lead will undertake appropriate procedures to
consider and fully assess the impact that providing the service may have on our auditor independence.
No threats to our independence have been identified.
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Appendix B - Materiality
Materiality is an expression of the relative significance or importance of a particular matter in the context of financial statements as a whole.
Misstatements in financial statements are considered to be material if they, individually or in aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
Judgements on materiality are made in light of surrounding circumstances and are affected by the size and nature of a misstatement, or a combination of both. Judgements about materiality are based on consideration of the common financial information needs of users as a group and not on specific individual users.
The assessment of what is material is a matter of professional judgement and is affected by our perception of the financial information needs of the users of the financial statements. In making our assessment we assume that users:
have a reasonable knowledge of business, economic activities and accounts;
have a willingness to study the information in the financial statements with reasonable diligence;
understand that financial statements are prepared, presented and audited to levels of materiality;
recognise the uncertainties inherent in the measurement of amounts based on the use of estimates, judgement and the consideration of future events; and
will make reasonable economic decisions on the basis of the information in the financial statements.
We consider materiality whilst planning and performing our audit.
Whilst planning, we make judgements about the size of misstatements which we consider to be material and which provides a basis for determining the nature, timing and extent of risk assessment procedures, identifying and assessing the risk of material misstatement and determining the nature, timing and extent of further audit procedures.
The materiality determined at the planning stage does not necessarily establish an amount below which uncorrected misstatements, either individually or in aggregate, will be considered as immaterial.
We revise materiality for the financial statements as our audit progresses should we become aware of information that would have caused us to determine a different amount had we been aware of that information at the planning stage.
We discuss with management any significant misstatements or anomalies that we identify during the course of the audit and we report in our Audit Completion Report all unadjusted misstatements we have identified other than those which are clearly trivial, and obtain written representation that explains why these remain unadjusted.
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Appendix C – Key communication points
ISA 260 ‘Communication with Those Charged with Governance’ and ISA 265 ‘Communicating Deficiencies In Internal Control To Those Charged With Governance And Management’ require us to communicate a number of points with you.
Relevant points that need to be communicated with you at each stage of the audit are outlined below.
Form, timing and content of our communications
We will present to the Audit Committee the following reports:
Our Audit Strategy Memorandum;
Our Audit Completion Report; and
Management letter.
These documents will be discussed with management prior to being presented to the Audit Committee and their comments will be incorporated as appropriate.
Key communication points at the planning stage as included in this Audit Strategy Memorandum
Our responsibilities in relation to the audit of the financial statements;
The planned scope and timing of the audit;
Significant audit risks and areas of management judgement;
Our independence;
Responsibilities for preventing and detecting errors;
Materiality; and
Fees for audit and other services.
Key communication points at the completion stage to be included in our Audit Completion Report
Significant deficiencies in internal control;
Significant findings from the audit;
Significant matters discussed with management;
Our conclusions on the significant audit risks and areas of management judgement;
Unadjusted misstatements;
Management representation letter;
Our proposed draft audit report; and
Independence.
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Appendix D – Forthcoming accounting and other issues The 2015/16 CIPFA Code of Practice on Local Authority Accounting (the Code) has made several changes to financial reporting requirements relevant to the Fund, of which you should be aware. We provide workshops explaining these changes to which we invite officers from the Fund responsible for preparing the financial statements. The workshops provide full details of the changes in the 2015/16 Code as well as a forward look to potential future accounting changes that may be of relevance to the Fund.
As well as the accounting issue outlined below, we would like to draw the Audit Committee’s attention to changes in the Accounts and Audit (England) Regulations 2015 that require the Council to notify us of the date on which the period for the exercise of public rights commences. If you require detailed information on any of these changes or any other emerging issues, please contact any member of the engagement team.
Forthcoming accounting issues
Early deadlines How this may affect the Fund
The Accounts and Audit Regulations 2015 outline earlier deadlines for local authorities to produce their statements of account from the 2017/18 financial year.
The impacts of this change on local authorities and their auditors are significant and we have begun to discuss how we will meet the challenges the new dates place on us all with Fund officers.
Early deadlines How this may affect the Fund
On 25 November 2015 the Government published the Investment Reform Criteria and Guidance, setting out how LGPS investment pooling would work. It was anticipated that LGPS assets would be pooled into six British Wealth Funds in order to save costs and increase investments in infrastructure.
The initial proposals submitted by funds in February 2016 showed that seven pooled funds are likely to be created.
The government expects the transition of assets to commence from April 2018.
The change will have a significant impact on the local government pension funds, and will present a number of challenges and risks including:
the transition of assets;
ensuring that adequate governance arrangements are put in place in the pooled fund; and
ensuring that funds continue to act in the best interests of members.
We will have regular discussions with Pension Fund officers to understand how these challenges are being met.
